I want to unpack some of the elements within Joe Biden’s Tax Plan, and what it could mean for the future of our country – and not just for the rich, but also for the middle class!
The information I’m presenting today is based on an article from wealthmanagement.com. I’ll attach the article at the end of today’s blog, and it will provide a broader-based explanation of the changes I am about to list.
Mr. Biden has used the budget reconciliation process to push through his Covid-19 relief package; this is a powerful avenue that is only available once per year. With the federal fiscal year set to begin anew on October 1st, budget reconciliation will be available again.
This time, with a Democrat-controlled House, and the tie-breaking vote in the Senate belonging to Democrat VP Kamala Harris, Mr. Biden will have the opportunity to press forward with many of his tax changes.
Some of these apply only to the ultra-wealthy, and some will ultimately affect the middle class. So what are the key potential tax changes that consumers and advisers need to keep their eye on?
- Reducing the federal estate, gift, and generation-skipping tax exemption to as low as $3.5 million (instead of the current $11.7 million). It’s also possible that the federal tax rate on estates is increased from 40% (on a graduated scale) up to 77% percent for very large estates.
- Eliminating discounting techniques: discounting the market valuation of limited liability partnerships or corporations due to minority interests, lack of marketability, etc. These have been very effective techniques in the past, reducing asset values by 30-40% for gift and estate tax purposes.
- Taxing grantor trusts in the grantor’s estate. Currently, such trusts are not includable as an asset in the grantor’s estate for estate tax purposes.
- Eliminating “step-up in basis” at the time of death. In my opinion, this is a real doozy that will affect many people, even the middle class. Under current tax law, the taxpayer’s unrealized capital gains at the time of death are NOT subject to capital gains tax. The beneficiaries of the estate then receive a new basis in those assets equal to market value as of the date of death.
In layman’s terms, how does this actually work?
For example, if over the course of my lifetime, I contributed $150,000 into a stock portfolio to purchase shares, that $150,000 is my cost basis.
If the value of those stocks grew to $400,000, and I sold my positions, I would owe capital gains tax on the appreciated value of those stocks. So I would owe capital gains tax on the $250,000 of growth in that stock portfolio (assuming I held the stocks for more than 1 year).
However, if I were to pass away, and the account was transferred to my beneficiary upon death, she would NOT owe capital gains tax on that $250,000. She would receive what is called a “step-up in basis” upon death, and her new starting point – her cost basis – would be the $400,000.
We may see a reversion to the “carryover basis” which would see the beneficiary receive the asset with the same cost basis that the decedent had. This will create a capital gains tax liability for the beneficiary where none had existed before.
- Limiting the generation-skipping exemption to a specific number of years. The strategy behind this proposal is to prevent the estate tax-free buildup of assets in generation-skipping trusts over multiple generations.
- Reducing the gift tax-free annual exclusion, which is currently $15,000 to as many individuals as the taxpayer wishes. Spouses can even join in with the gift-giving, so that would bring the annual gift tax-free exclusion to $30,000 per year… with unlimited individuals who can receive gifts.
Some of the proposals that they are considering would cap the amount of gift tax exclusion as a total figure… so for example, they could decide to cap the total gift tax-free annual exclusion to $20,000, or maybe $50,000, or whatever they decide – as a total for all donees.
- Increasing income taxes for high-earning taxpayers. The current 37% tax rate most likely will be moved up to a 39.6% tax rate, on a graduated scale… AND high-income earners may lose the tax favorable capital gains and dividends tax rates (it currently tops out at 20%) where their capital gains and dividends would be taxed at the ordinary income tax rate of 39.6%.
- Capping the benefit derived from income tax deductions and for upper-income taxpayers, the elimination of up to 80% of their deductions!
- Broadening the 12.4 percent Social Security tax on income from $142,000 to $400,000.
- Eliminating tax-free exchanges of real estate under IRC Section 1031. I have many middle-class friends who are real estate investors, and this would be really damaging to the future of their business.
Why? Well, it’s all about Monopoly. You know, the board game? Trading in 4 greenhouses for 1 red hotel?
Let’s say that someone had a rental property that they purchased for $150,000. Now over the next several years, the value of that house grew to $250,000.
If they sold the house, they would owe capital gains tax on the $100,000 of growth.
However – if they were to take that $250,000 and roll it into the purchase of a larger real estate property – say an apartment complex or hotel – they would not owe tax on the sale, per IRC 1031.
If that is eliminated, it could cause major problems for real estate investors.
- Imposing an annual wealth tax, requiring one to pay a percentage of one’s wealth, assessed on the value of all assets.
- Limiting the size to which IRAs and other retirement accounts can grow and/or assessing penalties to accounts that exceed limits.
Wow!
“Mr. Investor, Mr. Retirement Planner, you’ve done too well saving, investing, and being disciplined to provide for your future. You have too much, so we’re going to levy a penalty.”
When you take the time to examine these twelve proposed tax increases, you realize they could have a severe impact on the people who are already paying most of the taxes…. But bringing in some of the middle class to share the burden. Wow!!
In my opinion, here are a few things you can do to better your financial future:
- Vote Correctly – for freedom: for free markets, free enterprise, and capitalism.
- Get out of bad, consumeristic debt. If you have $100,000 in debt and receive less income due to higher taxes, and the dollar that you have doesn’t stretch as far as it used to due to inflation – that $100,000 could suddenly feel like $150,000 or $200,000.
- For retirement planning, work with a licensed professional to implement a strategy that will minimize the amount of taxes that you’ll have to pay on your retirement income, so you can maximize the amount of money you get to keep.
I can guide you in maximizing your net retirement income by helping you find the proper balance between the 3 buckets: tax-deferred, taxable, and tax-free. I want to help you hold on to as much money as possible, for your dream retirement – it’s money that you worked hard for!
Feel free to get ahold of me, I’m here to help!
Ron Sneller
Registered Financial Consultant
Investment Adviser Representative
Article:
Title: Twelve Potential Biden Tax Changes to Keep an Eye On
https://www.wealthmanagement.com (Wealth Management.com, March 18, 2021)
https://www.wealthmanagement.com/high-net-worth/twelve-potential-biden-tax-changes-keep-eye
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